As interest rates remain at their highest levels in over two decades and inflation puts pressure on consumers, major banks are bracing for potential risks associated with their lending practices. In the second quarter, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo all increased their provisions for credit losses compared to the previous quarter. These provisions reflect the funds that financial institutions set aside to cover potential losses from credit risks, including defaults and troubled loans, particularly in commercial real estate.
JPMorgan reported a provision of $3.05 billion for credit losses during the second quarter, while Bank of America set aside $1.5 billion. Citigroup’s allowance for credit losses surged to $21.8 billion, more than tripling its reserve build from the previous quarter. Wells Fargo had provisions totaling $1.24 billion. These increases indicate that banks are preparing for a more challenging economic environment, where both secured and unsecured loans could lead to larger losses.
A recent analysis from the New York Federal Reserve revealed that Americans collectively owe approximately $17.7 trillion in consumer loans, including credit cards, student loans, and mortgages. As pandemic-era savings diminish, credit card usage and delinquency rates are also climbing. Credit card balances exceeded $1 trillion for the second consecutive quarter, highlighting consumers’ growing reliance on credit. Additionally, the commercial real estate sector remains vulnerable.
Experts suggest that the uncertain economic landscape, exacerbated by high inflation and interest rates, adds complexity to the banks’ outlook. Brian Mulberry, a portfolio manager at Zacks Investment Management, indicated that the ramifications of stimulus measures implemented during the pandemic are still unfolding in the banking sector and consumer health.
Mark Narron from Fitch Ratings emphasized that banks’ provisions for credit losses reflect anticipated future credit quality rather than past performance. He noted that the banks are forecasting slower economic growth, rising unemployment, and potential interest rate cuts later this year, which may lead to an increase in delinquencies and defaults.
Citi’s Chief Financial Officer, Mark Mason, expressed concern over the situation for lower-income consumers, who have experienced a decrease in savings since the pandemic began. He highlighted that only the highest income quartile has managed to maintain their savings levels since 2019, with consumers holding higher FICO scores showing stronger spending and payment behaviors. In contrast, those in lower FICO categories are struggling more amid soaring prices and interest rates.
The Federal Reserve has maintained interest rates at a 23-year high of 5.25-5.5%, waiting for inflation to stabilize towards its 2% target before making anticipated cuts. Despite preparations for a potential spike in defaults later in the year, experts believe that current default rates do not indicate an impending consumer crisis, although they are closely monitoring the differences in experiences between homeowners and renters during this challenging period.
In summary, while the latest quarterly earnings reports showed no alarming trends in asset quality and reflected stable revenues and profits for banks, the ongoing high interest rates continue to pose risks that could increase stress within the financial system over time.